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How Walmart Is Changing China

The world’s biggest corporation and the world’s most populous nation have launched a bold experiment in consumer behavior and environmental stewardship: to set green standards for 20,000 suppliers making several hundred thousand items sold to billions of shoppers worldwide. Will that effort take hold, or will it unravel in a recriminatory tangle of misguided expectations and broken promises?

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Beside the Fifth Ring Road, one of the superhighways encircling Beijing like concentric shock waves radiating outward from the epicenter of an earthquake, sits an enormous big-box installation, one of thousands now proliferating throughout China. The parking lots flanking it are gridlocked with late-model cars and ruddy-faced peasants-turned-workers pushing long, snake-like trains of shopping carts toward the entrance.

Also see:

A Map of Walmart in China
From sea cucumbers in Dalian to upscale Sam's Clubs in Shanghai, Walmart stores vary from province to province.

Stepping into the building’s vast, windowless interior, I have the sense of entering an oversize Fabergé egg. But instead of refined scenes of aristocratic czarist life, I encounter thousands of middle-class Chinese engaging in the newest, and already the most inalienable, right in this erstwhile “People’s Republic”: shopping. This is the Shijingshan Shanmuhui, a Sam’s Club, one of the 352 stores that Walmart now operates in 130 Chinese cities.

Just inside the doorway, a scrum of salespeople hawk everything from roasted sweet potatoes to fitness-club memberships and massage chairs. Throngs of energetic customers push overflowing carts (fitted with data screens touting the latest bargains) making that familiar sound of wobbling rubber wheels on concrete. Indeed, its familiarity makes me feel I’ve been astrally projected back to Walmart’s natal place—Bentonville, Arkansas, which the current president and CEO, Michael Duke, recently referred to as the “Lighthouse of the Ozarks.”

But the young Chinese women workers in green aprons and sanitary masks make it undeniable that we’re a long way from the Ozarks. They call out their wares in Mandarin, proffering samples of soya-bean milk, date juice, and lychee jelly. Around them are mountainous piles of fresh pig intestines; pillow-size bags of dried fungus, seaweed, and mushrooms; packages of desiccated deer tendons (still attached to hooves!); inky-black dehydrated sea slugs; glistening octopuses on nests of chopped ice; and tanks of gulping fish, dazed frogs and turtles, and hyperactive shrimp.

Although Walmart’s $7.5 billion in Chinese sales receipts account for only 2 percent of the company’s annual revenues, its sales in China have risen substantially over the past decade. Sales in the United States, by contrast, have been shrinking. And as China’s retail market—the world’s fastest-growing—expands by 18 percent a year, Walmart’s executives smell the intoxicating scent of more growth to come. Equally important, if not more so, some 20,000 Chinese suppliers, or “partners,” reportedly provide Walmart with about 70 percent of the nearly $420 billion worth of goods that it sells globally each year. (Because of the complexity of the global supply chain, the percentage from China is hard to calculate.) China has become so crucial to Walmart’s supply chain that in 2002, the retail giant moved its global sourcing headquarters across the border from Hong Kong to Shenzhen, in southern China.

As I tramped across the country, from Shenzhen to Manchuria and from the North China Plain to Sichuan province, visiting Walmart retail outlets, factories, farm cooperatives, and executive offices, the Walmart/China axis loomed as something unprecedented. Beyond the sheer scale of the relationship, what struck me was how interactive Walmart and China have become. These two colossal entities, with such utterly different provenances—the world’s largest corporation and the world’s most populous country—have somehow managed to meet and maintain a state of relatively steady symbiosis, each fulfilling vital needs for the other. Just as China is providing Walmart with the lifeblood of its commercial growth, Walmart is helping the Chinese state not just to satisfy the escalating demands of its consumers but to extend Beijing’s regulatory writ. Together, they are engaging in a bold experiment in consumer behavior modification, market economics, and environmental stewardship. Just how this unlikely partnership will affect the evolution of these two larger-than-life entities is as yet uncertain. But one thing is already clear: how Walmart and China interact with each other over the next decade will be critical to the fate of the planet’s environment.

The Wager

Since the 1980s, many U.S. corporate leaders, policy pundits, China watchers, and politicians have suggested that the best way to curb China’s dedication to Leninism is to bathe the Chinese people in the solvent of the open marketplace. But although China has proved remarkably susceptible to the lure of “marketization,” its one-party system has shown little receptivity to political reform, especially to democratization. The Chinese Communist Party has always fiercely resisted any notion that it can be “changed,” especially by outside pressure.

Of course, over the past century and a half, most of the foreign missionaries, merchants, military emissaries, and educators who have sallied forth in hopes of “changing China” have returned home with little to show for their efforts. Like nitinol, a unique nickel-titanium alloy that possesses “shape memory,” bending at low temperatures only to regain its original form when heated, China has long rebuked foreign efforts to change it. So one might plausibly wonder why Walmart, a company that is so indelibly American, might now have an experience that is any different.

Indeed, Walmart has deep roots in conservative, southern, small-town, fundamentalist-Christian, anti-union, middle-American values. The founder, Sam Walton, was an ardent capitalist, devoted Christian, and militant anti-Communist who rolled all these values up into a quasi-religious/political credo, a founding faith for a business praised by then–Vice President Dick Cheney as “one of our nation’s great companies,” exemplifying “some of the very best qualities in our country—hard work, the spirit of enterprise, fair dealing, and integrity.”

Walton opened his first store in rural Rogers, Arkansas, in 1962. His policy of low markup and high volume—under the banner of “Always Low Prices. Always”—found immediate favor with ordinary Americans, as did the folksy bonhomie of the company’s business practices and corporate culture. By 1985, Walton had become the richest man in America—“a billionaire everyone can love,” as USA Today once dubbed him—and by 1989, Walmart was operating in 29 states. Then, in 1991, the company opened its first international store, in Mexico. Since then, with only a few notable failures (in Germany, Russia, and South Korea), it has continued to expand abroad. By 1999, Walmart had become the largest private employer in the world, and in 2003 Fortune magazinepronounced it the nation’s most admired company.

At first blush, such a pedigree would seem to make Walmart an unlikely candidate for an alliance with the People’s Republic of China. And when the company arrived there in 1996, the country was terra incognitafor Walmart executives. But the Bentonville behemoth actually shared more commonalities with its new partner than were first apparent—a curious alignment of goals and policies, even of organizational structures and “ideologies.”

Each is not only unelected, but also anointed with quasi-cultish Big Leader status to reign over a fundamentally authoritarian organization held together by an elaborate belief system or ideology bordering on the religious. And each presides over an enormous and complex apparatstaffed by a professionalized core of operatives—namely, Party leaders and cadres in China, and senior executives and mid-level managers at Walmart.

Each of these leviathan organizations seeks to influence the outside world through the media, advertising, and PR while at the same time maintaining the kultur among its own minions, through written propaganda, motivational campaigns, and sometimes coercive measures aimed at bringing refractory “comrades” or “associates” back into line. In fact, each system employs a significant amount of monitoring, even outright electronic surveillance, to make sure that employees and citizens and customers alike stay within the boundaries of “correct” behavior.

And finally, each professes a proud populism, always proclaiming a responsibility to better service. China’s leadership, with its socialist roots, has long stressed “serving the people,” while Walmart, with its capitalist roots, emphasizes “service to the customer.” In fact, Walmart stores in China prominently display personnel charts that are inverted pyramids, with the customers and lowest workers situated on the top tier and the managers on the bottom.

Just as Mao’s revolution elaborated an all-encompassing code of conduct and ideology, “Walmart culture,” known in Chinese as Woerma wenhua, became a set of principles that, in the words of one employee quoted in David J. Davies’s* insightful article on “corporate cadres” in the forthcoming book Walmart in China, “are not simply rules for a style of work, but are kind of ‘a way of life.’” This notion of an all-embracing culture has created a shared contradiction: while neither organizational structure is comfortable with dissent, they both value, and depend on, innovation. Leaders are left to confront the same question: How, in such a tightly controlled and closely monitored organizational structure, can they encourage the kind of independent, creative spirit that is essential to surviving and maintaining a competitive advantage?

In that respect, if China wants to keep developing its hybrid form of authoritarian capitalism, its leaders could do worse than to learn from Walmart, a corporate entity larger in scope and logistical complexity than any other in human history: Its 9,700 stores in 28 countries, supplied by a network of more than 100,000 sources in 60 countries, are staffed by some 2.1 million employees serving 200 million customers a week. Compare Walmart’s annual revenue with the GDP of sovereign nations, and it ranks in the top quartile. In many ways, the company is like a country. Its CEO, when abroad, is treated almost like a visiting head of state. Senior executives in charge of overseas operations function like diplomats, signing agreements with governments and businesses and managing the company’s interests. The various national arms of the Walmart Foundation operate almost like a government foreign-aid program. Even Walmart’s stores, arrayed around the world, seem almost as representative of America as our consulates and embassies.

Breaking the “Bentonville Bubble”

Certainly there are lessons for China in Walmart’s evolution over the past decade. By 2005, the company’s steady expansion had made it a magnet for criticism and earned it a reputation as a rapacious, anti-labor-union, un-environmental “big box” destroyer of small towns and independent businesses. Things had gotten so bad on the image front that in November 2004, Comedy Central’s South Park did a devastating episode on the opening of an outlet in the show’s imaginary Colorado town. The townspeople try to boycott the store, but are unable to resist its seductive bargains. Finally, the new store’s manager, burdened by guilt for all the atrocities Walmart has been perpetrating around the country, commits suicide, and the townspeople snap. Cartman and the rest of the South Park gang set off for Bentonville to stop the company’s insidious spread.

“Yeah. We’ve come to complain,” Kyle announces to a receptionist upon arriving at corporate headquarters. “We don’t want a Walmart in our town.”

“Who does?” the receptionist cynically retorts. “Nobody likes what the Walmart does, but it keeps … right on doing it!”

In classic, rapid-cut South Park fashion, the boys are ushered into the office of Walmart’s president and one of the store’s original creators, who has been drinking heavily and chain-smoking.

“We … invented the Walmart Supercenter in 1987,” he says laconically. “The idea was simple: build a store for one-stop shopping where bulk purchases could keep prices incredibly low. We didn’t know what we were doing. In just four years, it was out of control.”

“So how do we stop it?,” Kyle asks.

“You don’t stop it!” the president responds gravely.

“There has to be a way!,” Kyle pleads.

“There’s nothing! Don’t you understand?!” cries the anguished president. “Nothing can stop the Walmart in your town! … Unless … of course, you can find and destroy its heart … Destroy the heart, and you could reverse the entire process!” he continues, sounding like a remorseful evil genius in a low-budget sci-fi film.

So, of course, the South Park posse must save the world by finding and destroying the heart of their Walmart, which turns out to be located near the TV-sales department. You get the picture.

When the episode first aired, Walmart was, in fact, navigating through very difficult times. In 2001 it was hit by the largest class-action lawsuit in U.S. history, accused by more than 1 million women of employment discrimination. In 2003 it was raided for employing illegal immigrants, and in 2004 it was fined for environmental infractions. By then, a McKinsey & Company study was reporting that, because of all the “negative press,” Walmart had lost as much as 8 percent of its customers. In 2005, Robert Greenwald’s documentary Wal-Mart: The High Cost of Low Price charged the company with being “short on scruples and long on shabby treatment of the people who work for them.” Walmart’s reputation was at a low. “Bad years do happen to good companies,” noted Fortune a year later. “But for Walmart, 2006 was just another downer in a period of decline that’s lasted seven years and overlaps the tenure of the company’s current CEO, Lee Scott.” Indeed, Walmart’s damaged state was curiously similar to that of China itself, whose “brand” had taken an almost fatal hit following the bloody events of June 4, 1989. Both were badly in need of reputational rehabilitation.

Originally hired by Sam Walton to work in Walmart’s transport division, Lee Scott, who became president and CEO in 2000, is pretty much the stereotype of what many might imagine a Walmart executive to be. Tall, with sandy hair and a pale, almost forgettable face, he radiates a reassuring, no-nonsense air and Great Plains earnestness—a middle American who grew up in a small southeastern-Kansas town pumping gas at his father’s filling station and earned his degree at a state university while living in a trailer and working in a tire-mold factory.

Fed up with being viewed as an environmental despoiler and everyone’s punching bag, Scott had already begun questioning how he might turn around Walmart’s image, if not the corporation itself. In 2004, he connected with Jib Ellison, a former river guide who had recently set up a small consulting firm, Blu Skye Sustainability, in Sonoma County, California. “When I first met Lee, the guy was just getting pummeled,” Ellison told me. “I mean, the world was really turning upside down for him!”

After a discreet courtship, Ellison managed to break through the “Bentonville bubble,” as he calls it, and convince Scott that it was not enough to “limit Walmart’s exposure” to environmental criticism. He also had “an opportunity to use sustainability to ‘do well by doing good.’” According to Edward Humes, the author of Force of Nature: The Unlikely Story of Walmart’s Green Revolution, Ellison insisted “that inefficiency and waste were omnipresent, even in a notoriously stingy company like Walmart, with the waste not only damaging the environment, but damaging the company’s bottom line as well.” Identify and cut out the waste in areas like packaging, shipping, and energy use, Ellison said, and Scott would solve his company’s image problem and make a better return on investment.

It was a beguiling dream, so much so that Ellison persuaded Scott to make tiny Blu Skye a Walmart consultant, a decision that helped send the massive company off on an environmental odyssey and won Ellison the handle of “CEO whisperer.” Soon, Scott was inviting the longtime banes of Walmart’s existence—nongovernmental organizations like the Rocky Mountain Institute and the Environmental Defense Fund—to Bentonville for discussions with his executives.

In the company’s corporate narrative, October 24, 2005, is spoken of as “a defining day in the history of Walmart.” This was the day Lee Scott gave his “Twenty First Century Leadership” speech, broadcast via video to all Walmart stores and suppliers. In the same way Chinese Communist cadres quote from the revolutionary scripture of their Big Leader’s collected works, Scott began by citing Walmart’s founder. “Sam Walton’s dream to serve the underserved changed the world,” he said. “We didn’t get where we are today by being like everyone else and driving the middle of the road. We became Walmart by being different, radically different.”

Scott acknowledged that the company was “in uncharted territory as a business,” but he said that “after a year of listening, the time has come to speak, to better define who we are in the world, and what leadership means for Walmart in the 21st century.” Then Scott got to the point. “Environmental loss threatens our health and the health of the natural systems we depend on,” he told his audience. “As one of the largest companies in the world, with an expanding global presence, environmental problems are our problems.”

Scott acknowledged that naysayers would “think that if a company addresses the environment, it will lose its shirt.” But, he countered, “I believe they are wrong. I believe, in fact, that being a good steward of the environment and in our communities, and being an efficient and profitable business, are not mutually exclusive. In fact, they are one and the same.”

Walmart was a company with a reputation for having already “gotten religion” through Sam Walton. But now, it seemed on the verge of being reborn in a different way. In the most practical language, Scott tersely laid out three long-term goals, which he described as “both ambitious and aspirational”:

Scott left a stunned audience, but soon the company was examining every aspect of itself to find inefficiencies and waste. It condensed products like laundry detergent into small, more easily packed and shipped containers; retrofitted 7,000 big rigs with small auxiliary motors so that drivers would not run their engines just to cool their cabs while they slept; reduced the amount of cardboard and plastic used in packaging; and started buying directly from farmers to ensure cheaper, fresher, and more reliable organic lines of fresh food. The goal was to save money by becoming greener.

Susan Meiselas/Magnum Photos

A Greening in Shangri-La

With some 30,000 Chinese factories making things for Walmart, the company’s future was tied to China in the most elemental way. So Scott and his team knew that Walmart could never truly “green” its supply chain without taking on its Chinese partners. But, if China was going to be the laboratory of the future, it was difficult to imagine how even Walmart could wrangle such a far-flung and disparate range of suppliers into a responsive group.

On October 22, 2008, the CEOs and factory managers of more than 1,000 Chinese Walmart suppliers sat waiting in the Valley Wing Grand Ballroom of Beijing’s Shangri-La Hotel, for the beginning of Walmart’s China Sustainability Summit. Many of the attendees anticipated a significant new environmental announcement, and not a few of them were concerned. After all, Walmart was famous for pressuring suppliers to cut costs and reduce prices to the point where profit margins vanished. Moreover, the world economy had begun to careen toward breakdown, with countries like the United States cutting back precipitously on orders from abroad.

Heralded by a blast of pop music, Lee Scott strode to the podium. In characteristically flat tones, he started off with a few pleasantries about the Olympic Games, complimenting his Chinese audience for being part of a nation “that really gets things done.” Then he leaned into the topic at hand. “When Walmart first came to China,” he declared, “the government said that it expected us to be a model retailer. We have worked hard to try to meet those expectations … and to save money in the process.” He spoke without any dramatic oratorical pauses or expressive hand gestures. “And with the Chinese government expanding its goals for sustainability … it just makes sense that Walmart would be committed to being a more sustainable company here in China.”

As Scott continued in the cavernous and, by now, completely still room, he conveyed utter conviction. “Look around: we have 1,000 suppliers here. A year from now, each and every one of you who chooses to make a commitment will be a more socially and environmentally responsible company. And that will make a difference. It will make a difference for you, for Walmart, for China, for our customers, and yes, for the planet.”

Acknowledging that Walmart customers “need low prices,” he said he also believed that “more and more, they will be looking at the entire life cycle of a product: How is it made, how is it sold, how is it used, and how is it reused? To meet these customer expectations, we need to ask ourselves: Is a product made in a factory that is a responsible steward of the environment and our natural resources?”

On the crucial role of energy use, Scott declared, “The final factor that I see at work in bringing us here today is an increase in the global demand for energy and what that means for climate change.” Then, as if he were, in fact, a foreign minister, Scott warned: “This will be one of the greatest economic, environmental, and perhaps security challenges that the world will face in the 21st century … Meeting social and environmental standards is not optional. I firmly believe that a company that cheats on overtime and on the age of its labor, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honor its contracts, will ultimately cheat on the quality of its products.”

As his listeners were digesting all this, Scott assured them that Walmart was willing to “work with” them. But then he dropped the trap door: “If a factory does not meet these requirements, they will be expected to put forth a plan to fix any problems. If they still do not improve, they will be banned from making products for Walmart.” Like a priest admonishing parishioners to accept Communion or be excommunicated, Scott explained that each supplier would have to make a commitment to comply with these environmental standards. (Ultimately, they would also be required to open themselves to third-party auditors.)

“Some may wonder, even inside Walmart: With all that is going on in the global economy, should being a socially and environmentally responsible company still be a priority?” Scott did not yield an inch. “You’re darn right sustainability should be a priority!”

He was all but preaching now. With his hint of a southern accent and his almost religious sense of the righteousness—not to say the profitability!—of his cause, he seemed to be crescendoing toward some sort of evangelical climax. But, ever the model of middle-American restraint, Scott resisted the urge to overstep the bounds of oratorical modesty.

“I believe that as a businessman. I believe it as a person who has a responsibility to shareholders. And I believe it as a father and a grandfather. We will have better companies, better communities, and an even stronger commitment to a cause that is greater than each of us and unites us all. And we will leave a better world for future generations.”

Amen!

I turned to a Sichuan factory manager standing beside me and asked what he thought of Scott’s speech. He gave a worried frown.

At the press conference that followed, a Wall Street Journal reporter asked Scott, almost accusatorily, if these new demands on suppliers would simply presage a further squeeze of their already meager profit margins. In a tone as close to testy as he could come, Scott asked the reporter if she wouldn’t rather pay a few cents more for something that was made well and would not harm the environment.

No Benzyladenine in Your Bean Sprouts

What made Scott’s sermon so timely was the buildup in China of political and economic forces that augured well for the idea of a large and trustworthy foreign-owned company “going green.” Whereas up until about 2005, Party leaders had been dedicated to unfettered development, whatever its environmental cost, the five-year plan that went into effect in 2006 introduced the concept of kexue fazhan, or “scientific development,” which was a way of injecting the idea of a more environmentally sound kind of development into the equation without directly impugning all the previous efforts to promote economic progress. Then, over the next few years, the Party began heralding the notion of kechixude fazhan, or “sustainable development.”

As it happened, just at this time, growing numbers of Chinese were also becoming worried, even frightened and angry, about pollution, adulterated foods, and the corruption that kept local government agencies from taking remedial actions. And because more and more Chinese were not only erupting into spontaneous protests as a way to get action, but also looking to NGOs rather than to the government for relief, and because even the press had become more activist, the government became concerned about the impact of environmental damage on the stability of the country.

The number of scares involving illegal chemical additives in food was creating particular alarm. In 2008, milk products were found to contain melamine, a coal-based industrial chemical that, when ingested, can cause kidney stones and renal failure. (Melamine had been regularly used to give milk powder and baby formula a seemingly higher protein content.) As a result, some 300,000 Chinese consumers were sickened and at least six infants died. The Chinese government reorganized its food-inspection system in response, and its new Food Safety Law went into effect in 2009. Nonetheless, the dairy industry was hit again with scandals this year.

In the spring, hundreds were sent to the hospital when hogs from 16 provinces were found to have been fed a “lean meat powder” containing the toxic chemical additives ractopamine or clenbuterol, to produce less-fatty pork. In Guangdong province, authorities discovered and destroyed 45 tons of vermicelli noodles adulterated with industrial wax and ink; in Shenyang, police seized 40 tons of bean sprouts that had been illegally bathed in urea, sodium nitrite, antibiotics, and the plant hormone 6-benzyladenine, to make them grow faster and appear fresher. The food-safety situation became so serious that on April 14, Premier Wen Jiabao took the unprecedented step of speaking out, saying the recent scandals indicated that “dishonesty and moral degradation” had become a serious problem.

No wonder, then, that many in China’s burgeoning middle class, especially those with children, are seeking refuge in brand-name restaurants—particularly fast-food chains such as McDonald’s and KFC—and grocery markets such as Walmart. Walmart has several times come under fire in China for selling produce tainted with toxic chemical residues, and for mixing organic and nonorganic foodstuffs: this fall, for example, the Chongqing municipal government fined Walmart, and temporarily closed some of its stores, for mislabeling pork as organic. Still, because Walmart is a well-known multi-national corporation with so much at stake in terms of its global brand, Chinese shoppers have assumed that it will be a more trustworthy outlet. (Of course, Americans and Europeans have exactly the opposite reaction, seeking safety in small organic producers rather than big corporations.) And since the Chinese government, too, is concerned about people’s health and social stability, and its own legitimacy, it tends to see these larger, well-branded outlets as both models and responsible allies. “The government is still the most powerful force in China, and they have just adopted their 12th five-year plan, emphasizing food safety and domestic consumption,” David Gao, Walmart’s government-relations director for China, told me in the company’s Shenzhen headquarters. “If we want to push sustainability efforts and grow here, we have to have government support. So we want to align our strategy with government interests. And quite frankly, because the overall business climate for sustainability is favorable, I can’t think of any reason for not doing this.”

At the Shijingshan Sam’s Club on the periphery of Beijing, produce counters are stocked with three kinds of fresh products: youjide (organic), lusede (green), and wugonghaide (hazard free). A deputy manager tells me that sales of organic produce, meat, eggs, and oils have grown by almost 20 percent a year. When I stop a number of shoppers in the organic-produce section to ask them why they are willing to pay substantial premiums for food that looks the same as ordinary food, most show a characteristically wary Chinese attitude toward answering any question from a stranger and wave me away like a bad smell. But some agree to talk. One man says that he buys organic “because there are so many fake products on the market, and I am worried about my health.”

A young woman tells me, “If my salary was high enough, I would only eat organic.”

Another woman, with daughter in tow, says, “Some places will take rotten tomatoes and put them in the middle of good ones and then wrap them up in plastic. In my local supermarket, who knows? But I trust Walmart to buy the best.”

Walmart’s green and organic products are clearly designated with special labels that name the province and region where they were grown. Much of this food is sourced from the Direct Farm Program, which Walmart established in 2007; in 2008 the commerce and agriculture ministries invited Walmart to join their new, similar program. This initiative created a national mosaic of new agricultural hezuo she, or “cooperatives,” which echo the long-dismantled mandatory collectives and communes of the Mao era, but this time around have been formed voluntarily by regional farmers banding together to gain market clout and sell directly to large chains like Walmart.

“By buying directly through these co-ops, Walmart eliminates pieces of the supply chain that are not productive,” Leslie Dach, the company’s executive vice president for corporate affairs, tells me. “And we found that we can raise farmers’ income, supply them with extension-like services, and give them greater market access. On top of that, we can get stuff fresher and thereby cut down on food spoilage, which reduces waste and helps us lower our prices.”

Direct Farm offers one other incomparable benefit: by dealing directly with farmers, a retailer is better able to control the standards of food it advertises as green or organic. This is a huge asset in a country where few people trust an organic label not backed by a recognizable brand-name source. Still, as the Chongqing scandal shows, Walmart’s supply chain—or any other, for that matter—is hardly foolproof.

Susan Meiselas/Magnum Photos

The Fruits—and Boots—of Capitalism

To traverse the emptiness of the almost treeless steppes of Liaoning province in Manchuria, but at the same time drive on a magnificent, eight-lane freeway that runs parallel to a new high-speed overhead rail line (linking the port of Dalian to the provincial capital of Shenyang), is to experience one more of those seemingly infinite moments of counterintuitive amazement that now regularly jolt visitors to China.

As our van passes through hundreds of square kilometers of rolling cropland whose red earth has been manicured into squares of meticulously pruned vineyards and orchards of apple, pear, peach, and cherry, Liu Mei, who, with her sister, Liu Yan, founded one of the most successful fruit-distribution businesses in China, tells me her family’s story. Her tall, spike-heeled black-leather boots, dark-silk evening wear, and stylish coiffure hardly suggest the surrounding countryside, much less her odyssey from penurious post–Cultural Revolution watermelon vendor to mega-agri-entrepreneur. But of course, in today’s China, such rags-to-riches stories are not unusual. Liu Mei, who has adopted the English name Lucy, tells me how Walmart advisers initially visited the family-owned Dalian Xingyeyuan Group to explain how, by selling directly to large outlets, the business—and the co‑ops with which it worked—could be more efficient and profitable.

“We learned a lot about quality, pricing, and management from Walmart,” she says. “At first, we didn’t quite understand, but they patiently explained consumer demand to us. So we came to understand that Walmart not only had vision about these things, but also were the strictest in maintaining standards. Now we have started moving from green to organic.”

We arrive at her company’s local fruit-packing plant, the Dalian Glory Times Logistics Company, a large U-shaped building, once a school, standing alone in the midst of a patchwork of orchards. Here Dalian Xingyeyuan’s fruit is collected, sorted, stored in nitrogen-filled cold rooms, packaged, and shipped to its 1,000-plus warehouses in more than 100 cities all over China.

“Over the last couple of years, the problem of food safety has made people think hard about the origins of what they eat,” Liu earnestly tells me. “There are companies that put profit ahead of quality, so many consumers are coming to trust big names like Walmart, which has been a leader in organic food here and does pay real attention to inspections and standards.” She pauses before adding, “We have learned from Walmart how to become a company with a social conscience.” Then, suddenly sounding a little like a Catholic pilgrim reporting back on a tour of the Vatican, Liu proudly announces that she has actually been to Bentonville.

Dealing with China’s out-of-control industrial pollution has in many ways been far harder for Walmart than greening its agricultural product lines. One thing the company did early on was enlist the help of NGOs to monitor and train workers at its suppliers’ factories. This was a bold move, especially in a country where not only are NGOs still relatively undeveloped, but the government and the Party have a deeply ambivalent relationship with civil society.

One of the people Walmart turned to was Ma Jun, whose Institute of Public and Environmental Affairs maintains a detailed database, the China Water Pollution Map, that uses government statistics on illegal wastewater emissions to keep track of polluting factories. When Walmart representatives sought Ma out, he was as dubious as when he first arrived at the China Sustainability Summit, which he attended, as he put it to me, “without any confidence that they would eventually do anything different.” Several months after that first meeting, however, he got a call saying that a Walmart procurement team wanted to visit his Beijing office. “To our surprise, there were 15 people,” he recounted. “We didn’t even have that many chairs, so some of them had to sit on the tea table.” Now Walmart relies heavily on the institute’s database to identify factories violating China’s environmental-emissions regulations. “By late 2008, every month, they would do a comparison of their list of suppliers with our list of violators,” Ma told me. “This is exactly what we wanted them to start with.”

“Boldly Revolutionize the Towel!”

As dawn breaks over the North China Plain, the industrial smog is so thick that the sun reveals itself only as a blurry, fluorescent glow. The outskirts of Jinan, the capital of Shandong province, present an endless maze of high-rise buildings, freeway overpasses, industrial smokestacks, hourglass-shaped power-plant cooling towers, and factories, creating the kind of charmless tableau that has became a hallmark of “the China boom.”

About two hours from Jinan, Binzhou is just one more of the provincial Chinese cities whose hell-bent economies have helped hundreds of millions rise from poverty. Despite the existence of 160-plus cities in China with populations of more than 1 million (the United States has only nine), most Westerners have never heard their names. These cities have gone about development with every bit as much competitive fervor and totalism as they exhibited when the “correct line” called on them to foment Maoist class revolution. And their success has been even more revolutionary.

I have come to Binzhou to visit Loftex, one of Walmart’s suppliers of high-end bath towels. After the 2008 China Sustainability Summit, Walmart solicited some 200 of its largest provincial suppliers to join an Energy Efficiency Program, dedicated to achieving a 20 percent savings in energy use by 2012. Working with advisers from the Environmental Defense Fund, the National Resources Defense Council, and Business for Social Responsibility, Walmart challenged these companies to examine their supply chains for ways to save energy and cut costs. Loftex is one success story.

Just driving through the gates of Loftex’s sprawling headquarters and plant tells me that this company is striving for something. Giant signs emblazoned with slogans goad its 3,000 workers not to carry out class revolution, but to Boldly Revolutionize the Towel! and to Escape the Ordinary and Produce Top-quality Textiles! But most of the company’s slogans proclaim the need for employees to strive for greater environmental sensitivity. One reads: Enterprises Must Develop, but They Must First Protect the Environment.

The factory has its own coal-fired power plant, a wastewater treatment facility, and acres of floor space filled with machines that annually churn through more than 50,000 tons of cotton, largely from the United States. It runs 24/7, carding, spinning, weaving, dyeing, labeling, and packing towels, most of them destined to return to U.S. shores.

In a Loftex conference room decorated with tabletop bouquets of plastic lilies, a Venus de Milo–like statue (with arms!), a cast-iron sculpture of a bucking bronco (homage to Frederic Remington?), and some abstract oil paintings, I ask the factory’s general manager, Wang Hongxing, a smart, affable middle-aged man in a dark suit and tie, if he was present when Lee Scott gave his 2008 Beijing speech.

“I was, and our first thought was that it was a good thing,” he tells me cheerfully. “But our second thought was that the new policy was going to put a lot of pressure on us, and we didn’t know if we could accomplish Walmart’s goals. We had no idea what sort of investment it would involve. But we also didn’t realize that Walmart would have so many programs to help advise us on how to reduce energy and water use and reduce emissions.” Since then, Loftex has invested more than 4 million RMB (about $650,000) and cut electricity use by 25 percent and water use by 35 percent, achieving its 2012 energy-reduction goals a year ahead of schedule.

“Now, whenever we create a new towel, we always think about the environment!” pipes up Li Yongzhi, the assistant manager, reminding me of how the heads of Revolutionary Committees used to boast during the Great Proletarian Cultural Revolution about how many jin of corn they could harvest from so many mu of land, under the guidance of Chairman Mao. “We have begun experimenting with such things as new fibers derived from bamboo, and even from milk, which we mix with our cotton stock so that it will be faster-drying, and thus produce more-energy-saving towels.”

No doubt, Loftex’s exemplary progress in its sustainability crusade was why Walmart urged me to visit this model plant: I leave Loftex thinking of Wang, the general manager, as the bright kid in class who, because he always raises his hand with the right answer, gets called on by the teacher whenever important visitors stop by.

But Chinese industry abounds with bad actors, and some of them can be found in Walmart’s network. Ever since Walmart established its Ethical Standards Program in 1992 to improve labor standards among its suppliers, some critics have challenged the program’s effectiveness. In fact, the forthcoming book Walmart in China calls the whole effort into question, citing the company’s own admissions that serious violations have been a persistent problem. “The Corporate Social Responsibility industry,” observes Xue Hong, one of the book’s contributors, “has become a cat-and-mouse game between suppliers and their buyers.” Instead of engendering better compliance, Xue argues, such efforts have given rise to a massive new, and profitable, “corporate social responsibility” auditing industry that offloads responsibility for compliance from Walmart to outside auditors and suppliers.

While researching this piece, I repeatedly asked Walmart executives how many Chinese factories had actually been given “red” status and been “disapproved” as ongoing suppliers by Walmart’s Global Audit system, as Lee Scott had threatened back in Beijing. A clear answer was hard to come by. When I checked the company’s “2011 Global Responsibility Report,” I found China grouped with Japan and South Korea simply as the “Far East,” a region that was itself strangely incomplete, making one wonder if Scott’s threat was more bark than bite. When the company’s Ethical Standards team finally responded, it said that it does not “provide breakouts below the regional level.” The team did say, however, “The majority of the [failing] factories in that region are in China.”

Still, none of the environmentalists I spoke with viewed Walmart’s progress toward greater sustainability as simply a PR stratagem. Indeed, just as China’s tenacity and ability to deliver economic growth have recently begun to win new respect for its development model, Walmart’s perseverance in attaining its environmental goals has also won over a host of surprising new admirers. “Of course, journalists are always skeptical at first,” Jib Ellison tells me. “Everyone is always looking for the soft underbelly of Walmart. But in my experience, when they actually look under the hood, they are almost always blown away.”

By 2009, even The New York Times was effectively proclaiming a reincarnation of Walmart’s corporate soul. “The company that democratized consumption … has begun to democratize environmental sustainability,” it enthused. And when interviewed by Bloomberg Businessweek, Andrew Hutson, a supply-chain specialist at the Environmental Defense Fund, found himself not only explaining, but defending, the company’s often-reviled practice of exerting extreme pressure on suppliers to lower prices. “Lowest cost doesn’t have to come from past methods—the squeeze-’em-till-they-bleed approach,” he said. Acknowledging that such tactics had led to environmental degradation in the past, he insisted that Walmart was now doing something different by helping suppliers save money.

“Walmart is one of the most environmentally active and vocal companies,” Ma Jun, of the Institute of Public and Environmental Affairs, tells me admiringly. “I respect them for being willing to stick out their head. The globalized economy has created a big transfer of pollution to China. We export all these cheap products, but the waste gets dumped in our backyard, contaminating China’s water, air, soil, and coastal seas. I don’t think Walmart wants to see the day come when all this is blamed on its sourcing practices and they are held responsible for much of the damage. They want to do something now to change it.”

Measuring the Walmart Effect

Even if Loftex and the Dalian Xingyeyuan Group (to which Walmart had also sent The Washington Post) are Potemkin villages of a sort, what is telling about them is not simply how they have greened their supply chains, and saved a bundle in the process, but how they serve as important models for transforming Lee Scott’s vision from theory into practice. The use of such models is, of course, a time-tested Communist Party way not only to experiment with a new reform, but then to propagandize for it “among the broad masses,” and Walmart seems to have learned that technique well, at the hand of the master.

Through the so-called Walmart Effect—according to the scholars who study the enormous global footprint of the company’s management decisions—whatever Walmart does will profoundly influence all its competitors. So Walmart’s reincarnation as a company devoted to sustainability is, in fact, a catalyst for a positive global shift. When Michael Duke took over as CEO from Lee Scott in 2009, he not only reaffirmed Scott’s goals of ultimately having Walmart rely completely on sustainable energy, produce zero waste, and sell only sustainable products, but he began referring to these goals as the company’s “new normal.” “The great thing about Walmart’s green effort,” says Edward Humes, “is that, however they do it, it pushes other manufacturers to match them. And they are now exerting very positive influence at many levels.”

Perhaps Walmart executives such as Lee Scott, Michael Duke, and Leslie Dach will, with the help of environmental free-booters like Jib Ellison, prove to be clairvoyants in their ability to divine ineluctable environmental trends and green-market demands. They certainly seem to have arrived at a profitable and mutually advantageous partnership with the Chinese government. As China’s economy has decentralized, and many provincial and municipal governments have become rich fiefdoms riddled with corruption, Beijing has struggled to deal with tens of thousands of local polluting factories and hundreds of thousands of small-scale food producers, many of whom have been wantonly violating environmental regulations. But in large, well-organized companies like Walmart that operate nationally in China, the government has found auxiliary sources of public education, control, and regulation—all at no extra public cost.

Indeed, the commercial proselytizing by Walmart managers about the need to respond to consumer demands may end up changing China far more than previous generations of Western Christian missionaries, educators, or advocates of democracy and human rights ever did. For in such giant global corporations, which must please China’s increasingly demanding middle-class consumers in the marketplace, Chinese are becoming accustomed to wielding an influence that they have not hitherto had in the political arena. How Communist Party leaders will deal with such rising expectations is hard to predict. And, as Walmart surely understands, China can be a fickle mistress. Such liaisons of convenience can easily fall apart, especially if interests begin to diverge.

Even if the company has found accommodation and something of a global sweet spot in its efforts to go green and make more money, several other challenges elsewhere continue to bedevil it. Particularly in the United States, Walmart’s reputation continues to suffer from the company’s low hourly wages, fractious relationship with labor unions, allegations of failure to extend women staffers the same pay and promotion opportunities as men, and the damage done to communities and small businesses by the opening of new Supercenters nearby.

What’s more, the company may, by drifting from its old working-class values and customers, risk turning “the people’s store” into a big-box boutique. By appealing more to the kind of upscale clientele that goes from yoga lessons to Whole Foods, Walmart might just kill, or at least unsettle, the Sam Walton goose that has been laying golden eggs for several decades. In fact, with Walmart’s U.S. sales declining during the past nine quarters, critics are already asking how the company’s new green identity will sit with its traditional base, especially in the American South, now awash with rampaging Tea Partiers seeking to defeat climate-change legislation and defund the Environmental Protection Agency. A hint of blowback appeared this April, when The Wall Street Journal reported that the company had decided to launch an “It’s Back” promotional campaign to let its “core customers” in America know that the company would be restoring fishing tackle, bolts of fabric, and other “heritage” merchandise that it had removed from store shelves in what the paper called “a flubbed renovation effort.”

As I roamed through Walmart stores, visited factories, traipsed around co-op farms, and listened to corporate executives in China, I found myself pondering a question that I couldn’t get out of my mind, but that had little to do with Walmart’s immediate success in China or the world: However smart, prescient, and successful Walmart’s sustainability efforts actually turn out to be, just how “sustainable” is the whole bloody global-retail proposition that lies at the heart of the company’s amazing progress? Maybe Walmart’s new initiatives will pencil out in a business sense for the company and, within the terms of the current retail game, even serve as a model of good environmental stewardship. But will the hyperactive retail-consumption model that it has pioneered for global consumers pencil out for the world?

“Yeah, I worry that people will read my book and think that I have drunk the Kool-Aid,” says Edward Humes, reflecting on his admiring study of Walmart’s green progress. “When I started, I didn’t imagine I would be convinced that Walmart was green. And actually, they are not green, but they are a lot better than they were. And the efforts they are making are influencing not only their suppliers, but other businesses as well. Now Walmart is acting something like a private regulator. Nonetheless, the nature of their outsourced business model is not, ultimately, sustainable. But,” he says, laughing at the irony of what he is about to say, “we have created a situation where crazy-sounding things make sense.”

In fact, one could say the same thing about China, which—after so many decades of defiant proletarian opposition to capitalism, consumerism, and American imperialism—has embraced the American-style market and is ardently following the Walmart path to prosperity. Indeed, allowing, even encouraging, people to consume as much as they want, or can, has become one of the Chinese Communist Party’s key strategies for political legitimacy and social stability. Party leaders may label their version of development “scientific” or “sustainable,” but it’s still development. The bitter reality is that even if unrestrained consumerism becomes less environmentally destructive per unit of production than it was in the past, it is still unsustainable in the long run. So even as this most innovative of corporate and statist green strategies may represent an environmental breakthrough and good business for Walmart, and good politics for the Chinese government, it may nonetheless end up being very bad business for humankind.

Correction: The article originally referred to David J. Davies as Derek J. Davies.

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